Zscaler (ZS) is a leading technology company in the cybersecurity industry that helps companies anticipate and stop threats in the cloud. Its top products include the Secure Internet Access (ZIA), Secure Private Access, Digital Experience (ZDX), and Data Protection (CASB).
Zscaler’s business has grown rapidly in the past few years as demand for cybersecurity solutions has jumped. Its annual revenue grew from over $431 million in 2020 to over $2.16 billion in 2023.
This growth happened as it inked large deals with some of the biggest companies globally like Siemens, General Electric, NVIDIA, AutoNation, and Sanofi. It serves over 30% of all companies in the Fortune 500.
The company has been recognized as a leader in some of its top segments. According to Gartner, it is a leader in the Secure Web Gateways, where it competes with the likes of Blue Coat, Websense, and Cisco. It has also been named a leader in other categories like Security Service Edge (SSE) for three consecutive years.
Zscaler’s target market is large and is estimated to be worth over $96 billion. However, it is also a highly competitive market, with companies like Palo Alto Networks, Cisco, Symantec, and Fortinet having a large share.
Zscaler’s stock was trading at $156 on Monday while the HypeIndex score rising by 167%.
Positive hype
Zscaler’s hype has risen recently after it published mixed financial results that were mostly better than estimated. Its revenue rose by 30% to $592.9 million in the second quarter as the company passed 500 billion transactions per day.
Zscaler also narrowed its loss during the quarter to $14.9 million from $30.7 million in the same period in 2023.
Its free cash flow, one of the most important figures in a company, rose to $136 million last quarter and $544 million in the last financial year. Its FCF stood at over $20 million in FY’20.
The stock, however, dropped after its forward estimates came up short of expectations. Its revenue for the first quarter will be between $604 million and $606 million while its annual revenue will be between $2.6 billion and $2.62 billion. Analysts expect its revenue to be $2.62 billion this year, a 20% increase from the last financial year.
Zscaler expects to become a profitable company this year. Its earnings per share (EPS) is expected to come in at $2.96 this year and $3.58 in 2025.
Analysts have a bullish outlook for Zscaler, with the average stock target being at $220, higher than the current $156.
Analyst at Susquehanna, Rosenblatt, and JP Morgan maintained their positive, neutral, and overweight ratings.
Negative hype
There are signs that the company is relatively overvalued. Using the rule of 40 metric, the company has a net income margin of minus 2.6% and revenue growth of about 25%. This brings the total figure to 23. A Rule of 40 number below 40 is a sign that the company is prioritizing growth over profits.
Zscaler cites its Rule-0f-60 metric, which is made up of 34% revenue growth and 27% free cash flow margin, bringing its total to 61%, higher than the target of 40.
Zscaler also trades at a forward price-to-sales metric of 9, higher than the sector median of 2.67. Its forward price to cash flow of 31 is higher than the sector median of 20.
There are signs that the cybersecurity industry is slowing now that many large companies have procured their providers. Most cybersecurity companies like Palo Alto Networks, CrowdStrike, and Fortinet released mild financial results.
Summary on Zscaler stock
The Zscaler stock price dropped sharply after the company published mixed financial results. It dropped to the key support level at $156.30, its lowest swing on May 30th and August 5th.
The stock also crashed below the 50-day and 200-day Exponential Moving Averages (EMA), which have formed a death cross pattern. In most periods, financial assets tend to drop sharply after forming this pattern.
On the positive side, it has formed a triple-bottom pattern, a popular bullish reversal sign. Therefore, there is a likelihood that the stock will bounce back this week as some investors start to buy the dip. If this happens, it will retest the resistance point at $170. However, a break below the support at $156 will point to more downside.
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